<PAGE> 1
FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended JUNE 30, 1998 Commission file number:0-16641
RAINBOW TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3745398
(State of incorporation) (I.R.S. Employer Identification No.)
50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock, $.001 par value, outstanding as of June
30, 1998 was 7,815,497.
Item 1 of this Form 10-Q/A contains restated financial statements for the three
and six month periods ended June 30, 1998 (see Note 2 of Notes to Restated
Condensed Consolidated Financial Statements). Item 2 contains a revised
Management's Discussion and Analysis of Financial Condition and Results of
Operations that give effect to the restated financial statement amounts set
forth in Item 1.
<PAGE> 2
RAINBOW TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet at
June 30, 1998 (unaudited, restated) and December 31, 1997 4
Condensed Consolidated Statements of Operations (unaudited)
for the Three and Six months ended June 30, 1998 (restated - Note 2) and 1997 5
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the Three and Six months ended June 30, 1998
(restated - Note 2) and 1997 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six months ended June 30, 1998 (restated - Note 2) and 1997 7
Notes to Restated Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 1 to 5 - Not applicable
Item 6. Exhibits and reports on Form 8K 16
SIGNATURES 16
</TABLE>
2
<PAGE> 3
INTRODUCTORY NOTE
The Quarterly Report on Form 10-Q/A contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Company intends that
such forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements include (i) the existence and development of
the Company's technical and manufacturing capabilities, (ii) anticipated
competition, (iii) potential future growth in revenues and income, (iv)
potential future decreases in costs, and (v) the need for, and availability of
additional financing.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on the assumption that the Company will not
lose a significant customer or customers or experience increased fluctuations of
demand or rescheduling of purchase orders, that the Company's markets will
continue to grow, that the Company's products will remain accepted within their
respective markets and will not be replaced by new technology, that competitive
conditions within the Company's markets will not change materially or adversely,
that the Company will retain key technical and management personnel, that the
Company's forecasts will accurately anticipate market demand, that there will be
no material adverse change in the Company's operations or business and that the
Company will not experience significant supply shortages with respect to
purchased components, sub-systems or raw materials. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
3
<PAGE> 4
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
December 31,
June 30, 1998 1997
------------- -------------
(unaudited, restated
- Note 2)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 29,248,000 $ 29,556,000
Marketable securities available-for-sale .................... 4,236,000 6,841,000
Accounts receivable, net of allowance for doubtful accounts
of $478,000 and $500,000 in 1998 and 1997, respectively .... 16,988,000 16,343,000
Inventories ................................................. 9,469,000 9,780,000
Unbilled costs and fees ..................................... 665,000 1,782,000
Prepaid expenses and other current assets ................... 4,493,000 4,803,000
------------- -------------
Total current assets ................................... 65,099,000 69,105,000
Property, plant and equipment, at cost:
Buildings ................................................... 8,010,000 8,058,000
Furniture ................................................... 1,237,000 1,191,000
Equipment ................................................... 14,791,000 12,963,000
Leasehold improvements ...................................... 699,000 636,000
------------- -------------
24,737,000 22,848,000
Less accumulated depreciation and amortization .............. 7,659,000 6,315,000
------------- -------------
Net property, plant and equipment ...................... 17,078,000 16,533,000
Goodwill, net of accumulated amortization of $9,887,000 and
$8,736,000 in 1998 and 1997, respectively .................. 9,540,000 5,543,000
Product licenses, net of accumulated amortization of $692,000
and $469,000 in 1998 and 1997, respectively ................. 6,323,000 6,481,000
Other assets, net of accumulated amortization of $3,129,000
and $2,763,000 in 1998 and 1997, respectively ............... 7,781,000 5,389,000
------------- -------------
$ 105,821,000 $ 103,051,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 5,366,000 $ 4,937,000
Accrued payroll and related expenses ........................ 3,421,000 4,199,000
Other accrued liabilities ................................... 3,575,000 2,986,000
Income taxes payable ........................................ -- 861,000
Billings in excess of costs and fees ........................ 11,000 87,000
Long-term debt, due within one year ......................... 256,000 259,000
------------- -------------
Total current liabilities .............................. 12,629,000 13,329,000
Long-term debt, net of current portion ......................... 1,470,000 1,616,000
Minority interest .............................................. 1,316,000 1,723,000
Other liabilities .............................................. 15,000 24,000
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized,
7,815,497 and 7,817,836 shares issued and outstanding
in 1998 and 1997, respectively ............................ 8,000 8,000
Additional paid-in capital .................................. 29,823,000 30,633,000
Accumulated other comprehensive loss ........................ (1,212,000) (1,906,000)
Retained earnings ........................................... 62,062,000 59,811,000
------------- -------------
90,681,000 88,546,000
Less cost of treasury shares (12,500 and 88,868
shares in 1998 and 1997, respectively) ................... (290,000) (2,187,000)
------------- -------------
Total shareholders' equity ............................. 90,391,000 86,359,000
------------- -------------
$ 105,821,000 $ 103,051,000
============= =============
</TABLE>
See accompanying notes.
4
<PAGE> 5
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------------------------ ------------------------------
(restated (restated
- Note 2) - Note 2)
<S> <C> <C> <C> <C>
Revenues:
Software Protection Products .................... $ 14,450,000 $ 15,974,000 $ 28,620,000 $ 29,947,000
Information Security Products ................... 12,302,000 6,859,000 23,152,000 13,669,000
Ion Beam Surface Treatment ...................... 8,000 11,000 18,000 11,000
------------ ------------ ------------ ------------
Total revenues ............................. 26,760,000 22,844,000 51,790,000 43,627,000
------------ ------------ ------------ ------------
Operating expenses:
Cost of Software Protection Products ............ 3,859,000 4,594,000 7,414,000 8,774,000
Cost of Information Security Products ........... 9,414,000 5,243,000 18,019,000 10,955,000
Cost of Ion Beam Surface Treatment .............. -- 417,000 20,000 417,000
Selling, general and administrative ............. 6,411,000 5,451,000 12,008,000 10,716,000
Research and development ........................ 1,935,000 2,594,000 4,657,000 3,975,000
Goodwill amortization ........................... 747,000 447,000 1,304,000 860,000
Provision for reorganized operations ............ -- -- 370,000 --
Acquired research and development ............... -- -- 1,500,000 --
------------ ------------ ------------ ------------
Total operating expenses ................... 22,366,000 18,746,000 45,292,000 35,697,000
------------ ------------ ------------ ------------
Operating income .................................... 4,394,000 4,098,000 6,498,000 7,930,000
Interest income ..................................... 265,000 419,000 584,000 846,000
Interest expense .................................... (53,000) (70,000) (109,000) (140,000)
Other income (expense) .............................. 145,000 492,000 (989,000) 348,000
------------ ------------ ------------ ------------
Income before provision for taxes ................... 4,751,000 4,939,000 5,984,000 8,984,000
Provision for income taxes .......................... 1,882,000 2,125,000 3,733,000 3,738,000
------------ ------------ ------------ ------------
Net income .......................................... $ 2,869,000 $ 2,814,000 $ 2,251,000 $ 5,246,000
============ ============ ============ ============
Net income per share:
Basic ........................................... $ 0.37 $ 0.36 $ 0.29 $ 0.67
============ ============ ============ ============
Diluted ......................................... $ 0.35 $ 0.36 $ 0.28 $ 0.66
============ ============ ============ ============
Shares used in computing net income per share:
Basic ........................................... 7,795,000 7,773,000 7,781,000 7,784,000
============ ============ ============ ============
Diluted ......................................... 8,243,000 7,856,000 8,005,000 7,905,000
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
----------------------------------------------------------------
(restated (restated
- Note 2) - Note 2)
<S> <C> <C> <C> <C>
Net income .............................................. $ 2,869,000 $ 2,814,000 $ 2,251,000 $ 5,246,000
Other comprehensive income:
Foreign currency translation adjustment .............. 343,000 (1,142,000) 1,148,000 (3,895,000)
Unrealized loss on securities ........................ 3,000 (160,000) (4,000) (215,000)
Reclassification adjustment .......................... -- -- (6,000) --
----------- ----------- ----------- -----------
Other comprehensive (loss) income, before income taxes 346,000 (1,302,000) 1,138,000 (4,110,000)
Provision for income taxes related to other
comprehensive (loss) income ..................... (135,000) 521,000 (444,000) 1,644,000
----------- ----------- ----------- -----------
Other comprehensive (loss) income, net of taxes ...... 211,000 (781,000) 694,000 (2,466,000)
----------- ----------- ----------- -----------
Comprehensive income .................................... $ 3,080,000 $ 2,033,000 $ 2,945,000 $ 2,780,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
------------------------------
(restated
- Note 2)
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 2,251,000 $ 5,246,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization ................................................... 1,899,000 1,454,000
Depreciation ................................................... 1,405,000 1,002,000
Provision for loss in contract ................................. -- 400,000
Change in deferred income taxes ................................ (651,000) (106,000)
Allowance for doubtful accounts ................................ (21,000) 35,000
Loss from retirement of property, plant, and equipment ......... (12,000) 34,000
Write-down of long-term investment ............................. 1,320,000 75,000
Share in investee's loss ....................................... -- 45,000
Minority interest in subsidiary's earnings ..................... (306,000) (401,000)
Write-off of capitalized software .............................. 784,000 --
Provision for reorganized operations ........................... 370,000 --
Write-off of in-process research and development ............... 1,500,000 --
Changes in operating assets and liabilities:
Accounts receivable ......................................... (812,000) 190,000
Inventories ................................................. 1,183,000 831,000
Unbilled costs and fees ..................................... 1,117,000 581,000
Prepaid expenses and other current assets ................... 188,000 (133,000)
Accounts payable ............................................ (1,064,000) (1,268,000)
Accrued liabilities ......................................... (1,067,000) 872,000
Billings in excess of costs and fees ........................ -- (227,000)
Deferred revenues ........................................... (76,000) --
Income taxes payable ........................................ (228,000) 985,000
------------ ------------
Net cash provided by operating activities ................ 7,780,000 9,615,000
Cash flows from investing activities:
Purchase of marketable securities ................................ (1,636,000) (435,000)
Sale of marketable securities .................................... 4,220,000 2,293,000
Purchases of property, plant, and equipment ...................... (1,983,000) (4,182,000)
Net cash paid for acquisition of Wyatt River Software, Inc........ (7,662,000) --
Other non-current assets ......................................... (1,660,000) (570,000)
Acquired cash from QM Technologies, Inc .......................... -- 556,000
Capitalized software development costs ........................... (584,000) (680,000)
------------ ------------
Net cash used in investing activities .................... (9,305,000) (3,018,000)
Cash flows from financing activities:
Exercise of Rainbow common stock options ......................... 1,231,000 322,000
Payment of long-term debt ........................................ (137,000) (145,000)
Purchase of treasury stock ....................................... (149,000) --
Purchase and retirement of common stock .......................... (290,000) (2,767,000)
------------ ------------
Net cash provided by (used in) financing activities....... 655,000 (2,590,000)
Effect of exchange rate changes on cash ............................. 562,000 (1,441,000)
------------ ------------
Net increase in cash and cash equivalents ........................... (308,000) 2,566,000
Cash and cash equivalents at beginning of period .................... 29,556,000 31,735,000
------------ ------------
Cash and cash equivalents at end of period .......................... $ 29,248,000 $ 34,301,000
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid ................................................ $ 4,064,000 $ 3,082,000
Interest paid .................................................... 108,000 140,000
</TABLE>
See accompanying notes.
7
<PAGE> 8
RAINBOW TECHNOLOGIES, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)
1. Basis of presentation
The accompanying financial statements consolidate the accounts of Rainbow
Technologies, Inc. (the Company) and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated.
Certain amounts previously reported have been reclassified to conform with the
1998 presentation.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position at June 30, 1998 and results of operations for the three and six months
ended June 30, 1998 and 1997. The condensed consolidated financial statements do
not include footnotes and certain financial information normally presented
annually under generally accepted accounting principles and, therefore, should
be read in conjunction with the Company's December 31, 1997 Annual Report on
Form 10-K. Results of operations for the three and six months ended June 30,
1998 are not necessarily indicative of results to be expected for the full year.
The Company has subsidiaries in the United Kingdom, Germany, France, Belarus,
the Netherlands and India. The Company utilizes the currencies of the countries
where its foreign subsidiaries operate as the functional currency. In accordance
with Statement of Financial Accounting Standards No. 52, the balance sheets of
the Company's foreign subsidiaries are translated into U.S. dollars at the
exchange rates at the respective dates. The income statements of those
subsidiaries are translated into U.S. dollars at the weighted average exchange
rates for the respective periods presented.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
During the three and six months ended June 30, 1998 total comprehensive income
amounted to $3,080,000 and $2,945,000, respectively. The total comprehensive
income for the three and six months ended June 30, 1997 amounted to $2,033,000
and $2,780,000, respectively.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, "Disclosures about Segment of an Enterprise and Related Information,"
(SFAS No. 131), which requires publicly-held companies to report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The statement also
requires additional disclosures with respect to products and services,
geographical areas of operations, and major customers. The Company will adopt
SFAS No. 130 effective December 31, 1998 and will restate all periods presented.
8
<PAGE> 9
2. Restatement
Items 1 And 2 of the accompanying Form 10-Q/A have been restated and amended. In
September 1998, the Securities and Exchange Commission issued a letter to the
American Institute of Certified Public Accountants wherein a new valuation
method for in-process R&D was given. The new valuation method was to be
retro-actively applied to all acquisitions in 1998. During February 1999 the
Company performed a new valuation analysis related to the acquisition of Wyatt
River Software, Inc. in February 1998 (see Note 6 to the Notes to Consolidated
Financial Statements). Initial calculations of value of the purchased in-process
R&D in connection with the Company's 1998 acquisition of Wyatt River Software,
Inc. were based on the after-tax cash flows attributable to each project, the
selection of an appropriate rate of return to reflect the risk associated with
the stage of completion of each project. Revised calculations of the value of
the purchased in-process R&D are based on adjusted after-tax cash flows taking
into account the stage of completion of the purchased R&D at the date of the
acquisition, the contributions of the company's own distinct and unique
proprietary advantages, and the estimated total project costs of the purchased
in-process R&D in arriving at the valuation amount. As a result of the
modification, the Company increased goodwill by $1.3 million, developed
technology by $200 thousand and reduced in the in-process R&D write-off by $2.5
million.
The restatement resulted in the following impact on the Company's previously
reported results of operations for the three and six month period ended June 30,
1998.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1998
<S> <C> <C>
Net income (loss):
As previously reported ...................... $ 2,943,000 $ (150,000)
Adjustment related to acquired in-process R&D -- 2,500,000
Adjustment related to additional
amortization of intangible assets ........ (74,000) (99,000)
------------- -------------
As restated ................................. $ 2,869,000 $ 2,251,000
============= =============
Net loss per share - basic:
As previously reported ...................... $ 0.38 $ (0.02)
Adjustment related to acquired in-process R&D -- 0.32
Adjustment related to additional
amortization of intangible assets ........ (0.01) (0.01)
------------- -------------
As restated ................................. $ 0.37 $ 0.29
============= =============
Net loss per share - diluted:
As previously reported ...................... $ 0.36 $ (0.02)
Adjustment related to acquired in-process R&D -- 0.32
Adjustment related to additional
amortization of intangible assets ........ (0.01) (0.01)
Effect of dilutive securities ............... -- (0.01)
------------- -------------
As restated ................................. $ 0.35 $ 0.28
============= =============
</TABLE>
3. Earnings per share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128) effective December 31, 1997. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted
9
<PAGE> 10
earnings per share reflects the assumed conversion of all diluted securities.
Earnings per share amounts for all periods presented have been calculated in
accordance with the requirements of SFAS No. 128.
4. Government Contracts
The Company is both a prime contractor and a subcontractor under fixed-price and
cost-plus-fixed-fee contracts with the U.S. Government (Government). At the
commencement of each contract or contract modification, the Company submits
pricing proposals to the Government to establish indirect cost rates applicable
to such contracts. These rates, after audit and approval by the Government, are
used to settle costs on contracts completed during the previous fiscal year.
To facilitate interim billings during the performance of its contracts, the
Company establishes provisional billing rates, which are used in recognizing
contract revenue and contract accounts receivable amounts in these financial
statements. These provisional billing rates are adjusted to actual at year-end
and are subject to adjustment after Government audit.
The Company has unbilled costs and fees at June 30, 1998 of $665,000. Based on
the Company's experience with similar contracts in recent years, the unbilled
costs and fees are expected to be collected within one year.
5. Inventories
Inventoried costs relating to long-term contracts are stated at the actual
production costs, including pro-rata allocations of factory overhead and general
and administrative costs incurred to date, reduced by amounts identified with
revenue recognized on units delivered. The costs attributed to units delivered
under such long-term contracts are based on the estimated average cost of all
units expected to be produced.
Inventories, other than inventoried costs relating to long-term contracts, are
stated at the lower of cost (first-in, first-out basis) or market. Inventories
consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials ........... $ 584,000 $ 271,000
Work in process ......... 393,000 761,000
Finished goods .......... 4,045,000 4,257,000
Inventoried costs related
to long-term contracts 4,447,000 4,491,000
---------- ----------
$9,469,000 $9,780,000
========== ==========
</TABLE>
10
<PAGE> 11
6. Acquisitions
In March 1998, the Company purchased certain assets from Elan Computer Group,
Inc. ("Elan") in a cash transaction. The assets included Elan's license manager
software technology, which the Company had previously licensed from Elan, and
Elan's end-user maintenance and support relationships.
In February 1998, the Company acquired Wyatt River Software, Inc. ("Wyatt
River"), including its "LicenseServe" and "LicenseTrack" technology in a cash
transaction. The final consideration is subject to a determination based upon a
balance sheet audit of Wyatt River as of the closing. The Company will also pay
the Wyatt River shareholders an additional sum based upon sales of Wyatt River
technology through June 30, 1999.
7. Other assets
Included in other assets are certain investments in early-stage companies. The
Company closely monitors the operations and cash flows of these companies to
evaluate their status and ensure that amounts reported for these investments do
not exceed net realizable value. If the Company determines that impairment in
the investment of any such company exists, an adjustment would be made to reduce
the investment amount to net realizable value.
Also included in other assets are capitalized software development costs. Based
on the Company's product development process, technological feasibility is
established upon completion of a working model. Amortization of capitalized
software development costs commence when the products are available for general
release to customers and are determined using the straight line method over the
expected useful lives of the respective products. These amounts are written off
if it is determined that the projects can not be brought to market.
8. Stock split
On March 17, 1998 the Company announced that its Board of Directors approved a
3-for-2 split of its common stock. The effective date is July 1, 1998 and the
payout date is July 15, 1998. These financial statements have not been adjusted
to reflect the impact of the proposed stock split.
11
<PAGE> 12
RAINBOW TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the consolidated results of operations and the
consolidated financial position of the Company during the periods included in
the accompanying condensed consolidated financial statements. This discussion
should be read in conjunction with the related condensed consolidated financial
statements and associated notes.
The accompanying Form 10-Q/A has been restated and amended to incorporate the
results of a new valuation analysis related to the acquisition of Wyatt River
Software, Inc. The new calculations were based on the after-tax cash flows
attributable to each project, the selection of an appropriate rate of return to
reflect the risk associated with the stage of completion of each project.
Revised calculations of the value of the purchased in-process R&D are based on
adjusted after-tax cash flows taking into account the stage of completion of the
purchased R&D at the date of the acquisition, the contributions of the company's
own distinct and unique proprietary advantages, and the estimated total project
costs of the purchased in-process R&D in arriving at the valuation amount. As a
result of the modification, the Company increased goodwill by $1.3 million,
developed technology by $200 thousand and reduced in the in-process R&D
write-off by $2.5 million.
RESULTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues
Software Protection Products ..... $ 14,450 $ 15,974
Information Security Products .... 12,302 6,859
IBEST ............................ 8 11
-------- --------
Consolidated ..................... $ 26,760 $ 22,844
======== ========
Operating Income (restated)
Software Protection Products ..... $ 2,604 $ 6,467
Information Security Products .... 1,977 607
IBEST ............................ (187) (976)
-------- --------
Consolidated ..................... $ 4,394 $ 4,098
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues
Software Protection Products..... $ 28,620 $ 29,947
Information Security Products.... 23,152 13,669
IBEST ........................... 18 11
-------- --------
Consolidated .................... $ 51,790 $ 43,627
======== ========
Operating Income (restated)
Software Protection Products..... $ 4,418 $ 7,490
Information Security Products.... 2,554 1,416
IBEST ........................... (474) (976)
-------- --------
Consolidated ..................... $ 6,498 $ 7,930
======== ========
</TABLE>
12
<PAGE> 13
REVENUES
Revenues from software protection products for the three and six months ended
June 30, 1998 decreased by 10% and 4%, respectively, when compared to the same
period in 1997. The overall business has been impacted by the economic problems
in Asia and other emerging markets as well as by the erosion of the average
selling prices. Revenues from Europe increased by 5% while revenues from the US
decreased by 9% for the six months ended June 30, 1998 compared with the same
period in 1997. The decrease in US revenues is due to slower sales to US
customers who export their products to Asia as well as lower direct sales to
Asian distributors. The average selling price per product in the quarter ended
June 30, 1998 decreased approximately 8% when compared to the same period in
1997. Unit volume for the three months ended June 30, 1998 decreased by 3% while
unit volume for the six months ended June 30, 1998 increased by 8% when compared
to the corresponding 1997 periods. The decrease in average selling prices and
the increase in unit volume is primarily due to a change in customer mix.
Revenues from information security products for the three and six months ended
June 30, 1998 increased by 79% and 69%, respectively, when compared to the same
period in 1997. The revenue growth was primarily due to strong demand for
network security products.
GROSS PROFIT
Gross profit from software protection products for the three and six months
ended June 30, 1998 increased to 73% and 74% of revenues compared to 71% of
revenues for the corresponding periods in 1997. The increase in gross profit is
due to the absence of royalty expenses on the revenues generated from sales of
Elan software as well as benefits from manufacturing efficiencies.
Gross profit from information security products for the three months ended June
30, 1998 decreased to 23% of revenues compared to 24% for the three months ended
June 30, 1997. Gross profit from information security products for the six
months ended June 30, 1998 increased to 22% of revenues compared to 20% for the
six months ended June 30, 1997. The increase for the six month period is due to
the change in mix from predominantly contract revenues to predominantly product
revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the three and six months ended
June 30, 1998 increased by 18% and 12%, respectively, when compared to the
corresponding 1997 period. The increase was due to increased staffing and
professional expenses, new product introductions in software protection and
information security products, and higher marketing expenses.
RESEARCH AND DEVELOPMENT
Total research and development expenses for the three months ended June 30, 1998
decreased by 25% when compared to the corresponding 1997 period. The decrease in
research and development expenses was due to the restructuring of research and
development operations. Total research and development expenses for the six
months ended June 30, 1998 increased by 18% when compared to the corresponding
1997 period. The increase was primarily due to the write-off of previously
capitalized computer software development costs of $784,000 in the first quarter
of 1998.
PROVISION FOR REORGANIZED OPERATIONS
The sum of $370,000 represents the Company's estimate of the costs of
reorganizing certain operations.
13
<PAGE> 14
ACQUIRED RESEARCH AND DEVELOPMENT
Based on the results of third-party appraisals, the Company recorded charges of
$1,500,000 in the three months ended March 31, 1998 to expense in-process
research and development costs related to the acquisition of Wyatt River. In the
opinion of management and the appraiser, the acquired in-process research and
development has not yet reached technological feasibility and had no alternative
future use.
OTHER INCOME (EXPENSE)
Interest income for the quarter ended June 30, 1998 decreased by 37% compared to
$265,000 for the quarter ended June 30, 1997 because of lower balances of cash
and cash equivalents.
The minority interest share in QMT's operating losses in the three months ended
June 30, 1998 was $118,000 compared to $401,000 in the corresponding period in
1997.
With the purchase of certain Elan assets in March 1998 the original investment
in Elan was written off.
PROVISION FOR INCOME TAXES
The effective tax rate was 40% for the three months ended June 30, 1998 compared
to 43% for the corresponding period in 1997. The effective tax rate for the
first six months of 1998 was negatively affected due to the non-deductibility of
the charges related to the acquired in-process research and development.
Excluding the effect of these charges, the effective tax rate was 39% for the
six months ended June 30, 1998 and 42% for the six months ended June 30, 1997.
The lower tax rate is due to the benefits of the international restructuring of
foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of operating funds have been from operations and
proceeds from sales of the Company's equity securities. The Company's cash flow
from operations for the six months ended June 30, 1998 and 1997 were $7,780,000
and $9,615,000, respectively. The decrease in cash flow from operations is
attributable to the acquisitions of Wyatt River Software and certain assets of
Elan Computer Group.
The Company intends to use its capital resources to expand its product lines and
for the acquisition of additional products and technologies. The Company has no
significant capital commitments or requirements at this time.
The Company's use of cash includes purchases of property, plant and equipment,
repayment of long-term debt and investment in long-term assets.
Management believes the Company's current working capital of $52,470,000 and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's requirement for at least the next twelve
months.
14
<PAGE> 15
IMPACT OF YEAR 2000
The Company has completed a partial assessment and will have to modify portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and thereafter. The total Year 2000 project cost is
estimated at less than $100,000 which will be expensed as incurred. To date, the
Company has not incurred nor expensed any of these amounts.
The project is estimated to be completed no later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived using assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
15
<PAGE> 16
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Dated: March 29, 1999
RAINBOW TECHNOLOGIES, INC.
By:
/s/ Patrick Fevery
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-30-1998
<EXCHANGE-RATE> 1
<CASH> 29,248
<SECURITIES> 4,236
<RECEIVABLES> 17,467
<ALLOWANCES> (479)
<INVENTORY> 9,469
<CURRENT-ASSETS> 65,099
<PP&E> 24,737
<DEPRECIATION> 7,659
<TOTAL-ASSETS> 105,821
<CURRENT-LIABILITIES> 12,629
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 90,383
<TOTAL-LIABILITY-AND-EQUITY> 105,821
<SALES> 51,790
<TOTAL-REVENUES> 51,790
<CGS> 25,453
<TOTAL-COSTS> 45,292
<OTHER-EXPENSES> (989)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (109)
<INCOME-PRETAX> 5,984
<INCOME-TAX> 3,733
<INCOME-CONTINUING> 2,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,251
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
